When speaking on environmental issues affecting publicly-traded corporations, corporate officers, directors and management should be mindful of potential exposure to liability under the securities laws. After two oil spills in less than six months in Prudhoe Bay, Alaska, oil and gas company BP faces claims not only related to the environmental effects of the spills, but also securities claims from its shareholders.
On February 13, 2014, the Ninth Circuit Court of Appeals, in Reese v. Malone, Case No. 12-35260 (9th Cir., Feb. 13, 2014), reversed, in part, the dismissal of a securities class action brought by BP shareholders claiming investment losses after oil was discovered to be leaking from two separate pipelines in Prudhoe Bay in 2006. After the second spill, BP temporarily shut down operations in the region, and BP’s share price decreased by four percent.
The Court found the plaintiffs adequately pled that BP knowingly, or with deliberate recklessness, made false and misleading statements actionable under Rule 10b-5 and various sections of the Securities Exchange Act of 1934. The statements at issue regarded the condition, maintenance and monitoring of three Prudhoe Bay pipelines before and after the first spill, which occurred in March 2006. Specifically, the Court considered four statements made by officers of BP and its wholly-owned subsidiary, BP-Alaska, and one statement appearing in BP’s 2005 Annual Report.
Approximately two weeks after the first spill, BP-Alaska Senior Vice President Maureen Johnson told the Associated Press (“AP”) that corrosion that ultimately caused the first spill was observed in a 2005 inspection, “but appeared to be occurring at a ‘low manageable corrosion rate.’” Johnson also stated that the “highly corrosive conditions” leading to the first spill were “unique to that line,” and that similar problems had not been found in other pipelines in Prudhoe Bay. Then in May 2006, Johnson told an oil and gas trade publication that no other oil transit line in the region had “the same combination of factors” as the line where the first leak occurred.
The Court rejected BP’s arguments that Johnson’s statements were not misleading, but rather merely incomplete or preliminary. In so ruling, the Court noted BP’s own inspection and investigation data from before and after the first spill, which contradicted Johnson’s statements regarding the rate and presence of corrosion. The Court also disagreed with the district court’s finding that the plaintiffs failed to adequately allege Johnson’s statements were made with the requisite knowledge—or scienter—to be actionable under the securities laws. The Court found that given Johnson’s position as the head of the BP unit responsible for the spill, her role in communicating with the press regarding the condition of the pipelines, and the fact that a regulatory Corrective Action Order (“CAO”) discussing the similarities between the Prudhoe Bay pipelines was addressed directly to her, it would be “absurd” to believe she did not have knowledge of information contradicting her statements.
The Court did affirm the district court’s dismissal as to the class action claims based on BP CEO John Browne’s statement in April 2006 that the first spill occurred “in spite of the fact that [BP has] both world class corrosion monitoring and leak detection systems, both being applied within regulations set by the Alaskan authorities.” The Court agreed with the district court that Browne’s statement was false, but that plaintiffs had not alleged facts sufficient to create an inference of scienter, based on the timing of the statement, which was made before the BP Board received a detailed update about the first oil spill.
However, the Court disagreed with the district court regarding whether plaintiffs had adequately pled their securities claims based on a statement appearing in BP’s 2005 Annual Report. The Annual Report, issued June 30, 2006, stated: “Management believes that the Group’s activities are in compliance in all material respects with applicable environmental laws and regulations.” The Court found that the complaint cited evidence of numerous alleged and confirmed violations of environmental laws and regulations, such that the plaintiffs had adequately pled the falsity of the statement. As to scienter, the Court concluded it would be “absurd” for BP management to be unaware of the significant compliance issues, in light of the magnitude of the violations alleged and confirmed, the public attention surrounding the spills, and contemporaneous documents demonstrating management’s awareness of non-compliance with the CAO. Moreover, while acknowledging that the context of the statement alerted investors about risks of adverse effects on the company from potential future compliance issues, the Court also found that BP attempted to downplay its existing non-compliance and emphasize unpredictable risks associated with the industry at large.
Applying a “holistic” analysis, the Court determined that plaintiffs’ allegations against BP went beyond “simple corporate mismanagement,” and at a minimum compelled an inference of deliberate recklessness as to the false or misleading nature of the statements at issue. The parties now return to the district court to litigate the merits of the plaintiffs’ claims against BP.